There have been numerous changes to the buy-to-let tax rules in the last year, and the trend is set to continue, with interest relief due to be restricted from April 2017. Here we provide further information on the latest reforms, which could be unwelcome news for many residential landlords.
Under the existing rules, residential landlords can deduct all of their finance costs, such as mortgage interest, from their gross property income. However, starting from April 2017, relief for finance costs (including interest on mortgages, loans, and overdrafts) will be restricted to a maximum of the basic rate of income tax.
The new rules only apply to individuals with residential property businesses. They do not apply to companies, landlords of commercial properties or furnished holiday lettings.
Timescale for the change
The change will be introduced gradually over a period of four years. In 2017/18, the deduction from property income will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction. The basic rate reduction will apply to an additional 25% each year until 2020/21, when all financing costs incurred by a landlord will be given as a basic rate tax reduction (currently 20%).
Calculating the reduction
The reduction will be calculated at the basic rate value of the lower of:
- Mortgage interest and finance costs not deducted from rental income in the tax year
- Property profits less any losses brought forward
- Adjusted total income exceeding the personal allowance
The changes are likely to result in an increased tax liability for many residential landlords, but there may also be wider implications to consider. For example, the new rules will increase gross income, which may push an individual into a higher tax band, in turn affecting Child Benefit or available allowances. Where this is the case, an individual might want to consider reducing their income, for example by increasing their pension contributions or making Gift Aid donations. However, it is essential to seek professional advice before taking any action.
For more information on the tax rules affecting residential landlords, please do contact us.